Energy Recovery, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Energy Recovery designs and manufactures pressure exchanger and related energy-recovery solutions for seawater and industrial wastewater desalination, natural gas, chemical processing, and commercial and industrial refrigeration. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Reportable segments are Water and Emerging Technologies. Water revenue was primarily generated from desalination and industrial wastewater applications. Emerging Technologies includes products such as the PX G1300 for commercial and industrial refrigeration.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $13.4 million | $32.5 million | Down 59% |
| Gross profit | $8.2 million | $23.0 million | Down 65% |
| Gross margin | 60.9% | 70.8% | Down 990 basis points |
| Operating income (loss) | $(8.1) million | $8.2 million | Declined $16.3 million |
| Net income (loss) | $(6.3) million | $7.9 million | Declined $14.2 million |
| Diluted earnings (loss) per share | $(0.11) | $0.14 | Declined $0.25 |
| Cash flow from operations | $8.7 million | $(1.6) million | Improved $10.3 million |
Operating expenses increased 9.7% to $16.3 million, driven primarily by higher headcount, wages, benefits, and stock-based compensation. Sales and marketing expense increased to $4.9 million from $3.4 million, while research and development declined to $4.3 million from $4.9 million.
Interest income increased to $621,000 from $61,000 because of higher yields on investment-grade marketable debt instruments. The company recorded a $1.2 million income-tax benefit, compared with a $445,000 provision in the prior-year period. The Q1 2023 effective tax rate was 15.5%, and the rate excluding discrete items was 9.0%.
At March 31, 2023, cash and cash equivalents were $66.3 million, short-term and long-term investments totaled $35.4 million, and accounts receivable were $11.6 million. Total assets were $208.0 million and stockholders’ equity was $181.5 million. The company had no revolving loans outstanding and reported total liabilities of $26.5 million, including $13.0 million of non-current lease liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $19.1 million, primarily because of lower Megaproject revenue resulting from customer project timing and execution, particularly in the Middle East and Africa.
- Megaproject revenue fell 86% to $3.2 million from $23.8 million. OEM revenue increased 46% to $6.8 million, while aftermarket revenue declined 18% to $3.3 million.
- Water revenue declined to $13.3 million from $32.5 million, while Emerging Technologies revenue increased to $105,000 from $30,000.
- Desalination revenue increased 28%, with growth attributed primarily to Asia. Industrial wastewater revenue also increased, principally from Asia-based projects.
- Gross margin declined because of product mix, higher fixed manufacturing costs, and inflation-related cost increases, partly offset by higher average selling prices.
- Operating cash flow improved primarily because of collections on outstanding receivables. Accounts receivable declined $22.5 million during the quarter, while inventory increased $4.8 million as the company planned for growth and supply-chain needs.
- Q1 2023 investing activities provided $1.2 million, compared with $20.9 million used in Q1 2022, reflecting lower net purchases of marketable securities.
- No shares were repurchased in Q1 2023. Q1 2022 financing activities included $8.1 million of share repurchases.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing cash, investments, and anticipated operating cash flows should meet liquidity needs for at least the next 12 months. Additional financing could be required for acquisitions or substantial investments in new technology resulting from rapid market adoption.
During the quarter, the company announced more than $9 million of potential revenue opportunities from new PX contracts for desalination facilities in China, India, South Korea, and Indonesia. It also appointed Fieuw Koeltechniek as an exclusive PX G1300 distributor in the Benelux region, with set volume purchase commitments, and reported installation and commissioning of a PX G1300 at a major supermarket chain in the region.
The company identified typical quarter-to-quarter revenue variability and project timing as important factors affecting results. It expects international sales to remain significant and is exposed to foreign-currency, customer collection, supply-chain, inflation, product adoption, and market acceptance risks.
The JPMorgan credit agreement provides a $50.0 million revolving facility through December 21, 2026. At March 31, 2023, $19.0 million of the $25.0 million letters-of-credit component was utilized, including $17.2 million of outstanding letters of credit. The company stated that it was in compliance with all covenants.
The company reported no material lawsuits or probable or reasonably possible material litigation losses as of March 31, 2023. A newly disclosed risk concerns bank failures or financial-institution liquidity events affecting uninsured deposits or the availability of credit commitments. Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether the sharp decline in Megaproject revenue reflects timing alone and when delayed Middle East and Africa projects are expected to convert to revenue.
- The sustainability of OEM and industrial wastewater growth, particularly in Asia, and the scale and timing of the announced potential PX contract opportunities.
- Whether gross margin can recover from 60.9% as product mix, inflation, and fixed manufacturing-cost pressures evolve.
- Commercial adoption, volume commitments, and revenue contribution from PX G1300 refrigeration applications and other Emerging Technologies products.
- The company’s ability to remain cash-flow positive given project-driven working-capital volatility and the planned inventory increase.
- Available borrowing capacity after letters of credit, covenant compliance, and exposure to bank or financial-market disruptions.
- The effect of customer concentration: one customer represented 27% of Q1 2023 revenue and another represented 11%.